Money Box - Tax on lump sum withdrawals under new rules

jamesd

BazzerPontefract wrote: »

The questioner asked what would be the tax implications of taking a £30K sum from a pension pot.


The expert said: for tax purposes, the £30K drawdown would be considered as a request to drawdown £30K every month throughout the year, therefore the provider would assume an annual drawdown of £360K and tax on the initial drawdown under a temporary tax code and deduct tax proportionate to the annual value.

That's right but there are some ways around it:

1. Get a tax code to the pension provider before you take the lump sum.
2. Set up regular income instead of taking it all as a lump sum. Once the provider has the tax code you can take it as a lump sum.
3. If the lump sum is the whole amount of money in the pension pot there's a form you can use to reclaim the tax. If you don't take it all out you have to wait until you can file a tax return.

Getting HMRC to send the pension firm a tax code is probably the neatest way.

dunstonh

But if it came to the point when you were to claim Pension Credit if you aren't receiving a pension and it is still invested, the Dwp will calculate what that pension might be and adjust your Pension Credit to suit.

That has always been the case. Although it can be manipulated somewhat (pick an annuity comparison that gives the lowest annuity rate - joint life, RPI indexation, maximum death benefits etc)

dunroving

jamesd wrote: »

That's right but there are some ways around it:

1. Get a tax code to the pension provider before you take the lump sum.
2. Set up regular income instead of taking it all as a lump sum. Once the provider has the tax code you can take it as a lump sum.
3. If the lump sum is the whole amount of money in the pension pot there's a form you can use to reclaim the tax. If you don't take it all out you have to wait until you can file a tax return.

Getting HMRC to send the pension firm a tax code is probably the neatest way.

Thanks, jamesd, very helpful. I'm glad I will not be retiring in the near future as I think it will take a while for all of these wrinkles to be worked out by retirees who would previously have been buying annuities. Advice like this helps us know what action to take.

BazzerPontefract

jamesd wrote: »

That's right but there are some ways around it:

1. Get a tax code to the pension provider before you take the lump sum.
2. Set up regular income instead of taking it all as a lump sum. Once the provider has the tax code you can take it as a lump sum.
3. If the lump sum is the whole amount of money in the pension pot there's a form you can use to reclaim the tax. If you don't take it all out you have to wait until you can file a tax return.

Getting HMRC to send the pension firm a tax code is probably the neatest way.

That makes most sense, and a far more complete answer than the one offered on moneybox

SailorSam

dunstonh wrote: »

That has always been the case. Although it can be manipulated somewhat (pick an annuity comparison that gives the lowest annuity rate - joint life, RPI indexation, maximum death benefits etc)

Thanks,
I've got 2 small pension pots both between £9k and £10k, and i shall be able to claim Pension Credit from June 2016. Until i heard Moneybox today i was going to leave 'the savings' were it is incase it's needed in the future some time.
Still plenty of time but must look into this.

jem16

jamesd wrote: »

That's right but there are some ways around it:

1. Get a tax code to the pension provider before you take the lump sum.
2. Set up regular income instead of taking it all as a lump sum. Once the provider has the tax code you can take it as a lump sum.

How will having a tax code help James?

If the lump sum is paid early in the tax year, it will still end up with more tax being taken.

Thrugelmir

SailorSam wrote: »

But if it came to the point when you were to claim Pension Credit if you aren't receiving a pension and it is still invested, the Dwp will calculate what that pension might be and adjust your Pension Credit to suit.

If you've withdrawn and spent the money. Then it'll be treated as deprivation it seems when being assessed for welfare support. This may well catch some people out.

mgdavid

jem16 wrote: »

How will having a tax code help James?

If the lump sum is paid early in the tax year, it will still end up with more tax being taken.

you have a conversation with HMRC which will cover all your sources of income for PAYE, whether SP, DB pensions, annuity or whatever. The result will depend on individual circumstances, for example in my case the larger DB pension uses the 1060 code, the other DB pension and the small annuity use BR, as does my SIPP provider on anything I withdraw under capped (this yr) or flexible DD (next yr). I explained to HMRC that I will manage DD to stay below HRT. I will do one large DD at year start based on 90% of projections, and a very small adjusting DD at year end to use up the remaining basic rate allowance.
I found HMRC very helpful - if you give them *all* the info and refs plus your objective they will tell you the best way to arrange it.

mgdavid

BazzerPontefract wrote: »

........
The questioner asked what would be the tax implications of taking a £30K sum from a pension pot.
The expert said: for tax purposes, the £30K drawdown would be considered as a request to drawdown £30K every month throughout the year, therefore the provider would assume an annual drawdown of £360K and tax on the initial drawdown under a temporary tax code and deduct tax proportionate to the annual value..........

I find this utterly bemusing if not downright wrong. If you manage a SIPP online it is part of the request process to define if it's a one-off or repeat (periodic) DD.

jem16

mgdavid wrote: »

I explained to HMRC that I will manage DD to stay below HRT. I will do one large DD at year start based on 90% of projections, and a very small adjusting DD at year end to use up the remaining basic rate allowance.

That's fine as you seem to have your DD on a BR tax code so it will take 20% off all of it. That will work if you have more than one income source.

However, assuming only one income source, BR wouldn't help and a "normal" tax code of 1060L would see too much tax being taken off if early in the tax year.

I found HMRC very helpful - if you give them *all* the info and refs plus your objective they will tell you the best way to arrange it.

Yes they are very helpful but there's only so much they can do and lump sums, be it bonus payments in salary or pension, are always going to be difficult.